Bank reconciliation

Bank Reconciliation Meaning

A process used by individuals and businesses to ensure that financial records (account balances, transactions) are accurate and in agreement with the bank statements provided by the bank.

Bank Reconciliation Statement

A document that summarizes the reconciliation process and the final adjusted balances of the bank statement and the company’s accounts.

Components of Bank Reconciliation Process

  • Statement Balance: The balance as reported by the bank in the monthly statement.
  • Check Register Balance:The balance in the check register or accounting records of the individual or business.
  • Deposits in Transit: Amounts that have been deposited but not yet reflected on the bank statement.
  • Outstanding Checks: Checks issued but not yet cleared and deducted from the bank account.
  • Bank Charges and Fees: Charges imposed by the bank which might not have been recorded in the business’s books.
  • Interest Income: Interest earned on a bank account that may not yet be recorded in the account holder's records.
  • Errors: Mistakes either by the bank or the account holder in recording transactions.

Purpose of Bank Reconciliation

  • Error Identification: To identify errors in recording transactions in either the bank’s records or the company’s books.
  • Fraud Detection: To detect any unauthorized transactions that might indicate fraud.
  • Accurate Financial Statements: To ensure the accuracy of financial records and statements.
  • Cash Flow Management: To accurately understand the available cash for better cash flow management.
  • Frequency of Bank Reconciliation: Typically conducted monthly, following the receipt of the bank statement, but the frequency can vary based on the volume of transactions and the specific needs of the business or individual.

Process of Bank Reconciliation

  • Comparing Documents: The starting point is to compare the bank statement with the company’s own records.
  • Adjusting Balances: Adjustments are made for any discrepancies due to timing differences, errors, or unrecognized transactions.
  • Identifying Discrepancies: Any discrepancies between the two records are investigated and resolved.
  • Updating Records: Once reconciled, the accounting records are updated to reflect the accurate balance.